There was quite a stir overnight when it was revealed that high-yield funds saw $7.07 billion in outflows, a record for one week. That includes mutual funds and ETFs and is the fourth straight weeks of redemptions.
The two largest high-yield ETFs, SPDR Barclays High Yield (JNK) and iShares US High Yield (HYG), had combined outflows of about $2.4 billion in the last month, according to ETF.com. Given that the two have a present combined market cap of about $21 billion, that would be an outflow of about 10 percent.
That seems high, no? Like, a lot? Is this an earthquake of some sort?
Well, yes and no. First, as Dave Nadig at ETF.com has pointed out to me, the daily flow in and out of these high-yield funds is incredibly noisy. It is fairly typical, for example, to see flows of $100 to $250 million a day in HYG, for example, which has an $11 billion market cap. That's a one to two percent ebb and flow everyday.
In other words, given that a one to two percent flow in and out is typical on a daily basis, a 10 percent outflow in a month is certainly high, but not unbelievable.
Second, there is the issue of relative return, and here is where a lot of people make a mistake. They just look at prices. True, prices are down roughly two to three percent in the past month in these ETFs, but they appear to have stabilized. Since bottoming at the end of July, the HYG is up every day this week.
And remember, these bond funds are high yield: They are currently paying out roughly 5.7 percent interest, about three percentage points above the 1.9 percent yield from the S&P 500, and they make monthly distributions. So you can't just look at a price chart.
Is the high-yield bond market overvalued? I think so. It's certainly no fun to get a five percent return on what are supposed to be much higher-risk instruments. But this is what happens when everyone reaches for yield.
But is this the start of a SIGNIFICANT, long-term correction in high yield? I'm not sure. The most important factor is the state of the economy and the likelihood of default on any of these bonds. But the economy is improving; credit risk seems fairly low at the moment.
Remember, although they are bond funds, in times of high volatility they can act like stock funds: they go down, not up. The S&P dropped about three percent in the past few weeks. So there is a lot of noise that is impacting these funds now that could go away (or increase) very quickly.
But if cheap money isn't cheap any more...well, that's a different story. If the 10-year yield starts moving...if, for example, it goes north of three percent from 2.4 percent now...high-yield funds should move up in yield, down in price. How much? Not entirely clear, but I wouldn't be surprised to see another three ercent drop in prices.